New home starts fall by more than expected in Aug.

Builders in the U.S. broke ground on the fewest new homes since 1991 last month, signaling that the economy will continue to erode in coming months.

Housing starts fell 6.2 percent in August to an annual rate of 895,000, the fewest since January 1991, the Commerce Department said in Washington. Building permits, a sign of future construction, dropped 8.9 percent to an 854,000 pace.

"The home-construction industry is still in a deep recession and will remain there probably for the rest of the year," said Patrick Newport, an economist at Global Insight Inc. in Lexington, Massachusetts, who forecast a decline to 893,000. "There are just too many houses on the market."

Stocks slid as banks hoarded cash, sending money market rates higher and threatening to worsen the credit crunch that has made it tougher for homebuyers to get loans. The housing and credit meltdowns that led to the collapse of Lehman Brothers Holdings Inc. may continue to subtract from growth for the rest of the year and into next.

Starts were projected to fall to a 950,000 annual pace from a previously estimated 965,000 in July, according to the median forecast of 74 economists polled by Bloomberg News. Compared with August 2007, housing starts were down 33 percent.

Construction of single-family homes declined 1.9 percent to a 630,000 rate, today's report showed. Work on multifamily homes, such as townhouses and apartment buildings, dropped 15 percent from the prior month to an annual rate of 265,000.

Starts decreased in three of four regions, led by a 15 percent slump in the Northeast. Construction was down 14 percent in the Midwest and 7.4 percent in the South. The West showed an 11 percent gain.

Builders completed 961,000 homes at an annual rate last month, the fewest since September 1982.

Combined existing and new-home sales have declined 36 percent from their 2005 peaks. Nationwide, home prices have fallen 19 percent on average from their peak in July 2006, according to the S&P/Case-Shiller index of 20 cities.

The credit crunch spawned by the subprime mortgage crisis forced Lehman Brothers Holdings Inc. this week to file for bankruptcy, just a week after the government took over Fannie Mae and Freddie Mac, the two biggest buyers of mortgages.

Federal Reserve policy makers Tuesday left the benchmark interest rate unchanged at 2 percent for a third consecutive meeting. Chairman Ben S. Bernanke and his colleagues signaled they will continue to address market turmoil with emergency lending.

As banks tighten lending standards and confidence slumps, consumer spending is faltering. Retail sales in August dropped for a second month, Commerce reported last week.

Homebuilders remain gloomy. A report Tuesday from the National Association of Home Builders/Wells Fargo showed confidence among U.S. homebuilders this month held near the lowest level since records began in 1985.

As home prices continue to fall, more and more Americans a forced into foreclosure as they owe more than their homes are worth. Stricter lending rules also limit opportunities to refinance out of adjustable-rate mortgages before they reset higher.

Foreclosure filings rose to a record in August, RealtyTrac Inc. said Sept. 12. One in 416 U.S. households got a default notice, was warned of a pending auction or was foreclosed upon.